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Optimal Replacement Cycles of Highway Operations Equipment (2018)

Chapter: Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes

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Suggested Citation:"Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
×
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Suggested Citation:"Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
×
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Suggested Citation:"Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
×
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Page 82
Suggested Citation:"Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
×
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Page 83
Suggested Citation:"Chapter 7 - Case Example Illustrating Use of the Optimization Tool and Replacement Processes." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Page 83

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74 Case Example Illustrating Use of the Optimization Tool and Replacement Processes Review the tool’s user manual before walking through the following example. To illustrate the replacement process and demonstrate how to use the tool to support the process, consider the example scenario described in Table 12 for the class of tandem dump trucks. Most of the data used in this example were provided by a fleet agency. Where data were not available from the agency, hypothetical data were used. The following steps illustrate the equipment replacement process. Step 1. Review and Update Replacement Factors Before using the optimization tool for the first time, config- ure the tool and tailor the replacement factors to the agency’s specific needs. At the beginning of each new year’s planning cycle, review and update the factors as needed (not all fac- tors require updating each year). Factors that typically change from year to year include • Unit replacement costs for each equipment class; • Inflation rate; • Overhead factors; and • Replacement planning target values—age and utilization. Updating the replacement factors annually will result in accurate and reliable cost analysis results. Update the replacement factors in the tool’s configuration file, as shown in Figure 15. Step 2. Download Equipment Data from Agency Data Source After updating the replacement factors, download the required equipment data from the agency’s equipment infor- mation data source. The source may be a fleet management system, accounting system, or other repository of equipment information. Two types of data are required: • LTD data for completing the class-level LCCA and • Annual data for completing the unit-level LCCA. For this example, LTD data were downloaded for 720 tan- dem dump trucks. Figure 16 shows an example of the class- level LCCA data. In the example, Unit 51129 is a 17-year-old vehicle with 159,330 LTD miles. The downloaded data include LTD M&R cost (parts, labor, and commercial), LTD fuel cost, LTD downtime hours, and the original purchase cost of the unit. The original purchase cost is optional as the tool uses current replacement cost to perform LCCA. The year format used is a four-digit general number and not the Excel date format. To perform unit-level LCCA, the tool requires annual data for each equipment unit, shown in Figure 17. Step 3. Review Downloaded Data for Errors Note: The downloaded data require close examination and cleanup to ensure reliable cost analysis. Even with the best of information systems, data input errors can occur, and it is likely that there will be errors in the equip- ment data downloaded in Step 2. Delete equipment units with obvious data errors before entering them into the optimization tool and correct suspicious or questionable data if possible. Erroneous or unreliable data can occur for several reasons. Sometimes odometers or hour meters are changed during a unit’s life, meaning that true LTD miles or hours are not avail- able. Errors may also occur at the source reporting level, such as the shop work order. Some equipment units may have unus- able data because they are new and have limited utilization and cost history to be representative of future cost trends. There is no specific methodology for correcting the data; use any techniques that are preferred. The optimization tool C H A P T E R 7

75 automatically disregards units that are less than 1 year old but does not edit data errors. It is best to perform a rigorous edit routine externally to the tool. The most appropriate method is to download the data from the internal systems into an Excel file and then run some basic checks to examine the data for accuracy. After running the data through the external editing process, it is ready to input to the tool. Some basic guidance for data editing and cleanup follows. Example Scenario Equipment Class: DT-5000, Tandem Dump Trucks Number of Units in Class: 720 Available Replacement Budget: $8,000,000 Unit Replacement Cost: $117,000 Table 12. Case scenario. Figure 15. Configuration file. Figure 16. Sample data for class-level LCCA, tandem dump trucks.

76 Eliminate Low Utilization Units Figure 18 is an example of two low utilization units with 1,125 and 733 miles, respectively. These units are deleted from the analysis because their utilization is too low to provide rep- resentative cost history. In the case example, all units with less than 3,000 miles were eliminated. The 3,000-miles is an arbitrary threshold; the agency may select a threshold suited to the agency. One technique for reviewing the utilization data is to sort it, either by age or miles, from lowest to highest. This tech- nique allows for easy identification of low utilization units. Identify Obvious Errors or Questionable Data Figures 19, 20, and 21 are examples of what appear to be obvious errors or questionable data. Figure 19 shows four units that have an “In Service Year” of 1900. If the true in-service year cannot be identified, the units should be deleted. Figure 20 shows three units with negative expenditures noted in red in the “Commercial” cost column. Any negative numbers in the cost columns for labor, parts, commercial, or fuel are a red flag for possible errors. Eliminate Extreme Outliers The equipment cost and utilization history of some units may not be representative of typical units in a class. If there are extreme outliers where mileage, hours, or LTD costs are far outside the norm, it may be appropriate to eliminate those units from the class-level LCCA so they do not skew the results. Figure 21 provides some examples. Unit 51107 shows negative miles; Unit 51184 is a 14-year-old truck with only 36,862 miles, which is far outside the norm for other similar-aged units; and Unit 51333 is a 12-year-old truck with 901,206 miles. These types of outliers should be identi- fied, examined, and either corrected or eliminated from the cost analysis. Step 4. Upload Data into the Optimization Tool After cleaning up the data, the data are ready for input into the optimization tool. In this example, 720 units were down- loaded from the agency’s data source. As part of the cleanup process in Step 3, 35 units were purged due to data errors, Figure 17. Sample data for unit-level LCCA, tandem dump truck. Figure 18. Example of low utilization units, tandem dump trucks.

77 Figure 19. Example of obvious data errors. Figure 20. Example of questionable commercial cost data. Figure 21. Example of outlier data.

78 leaving 685 units to be analyzed by the optimization tool. The data were then input into the optimization tool in the formats shown in Figures 18 and 19. Step 5. Perform Class-Level LCCA After the cleanup data are entered into the optimization tool, the LCCA is performed automatically. Figure 22 shows the printout for class-level LCCA (for the 685 tandem dump trucks included in the example). The optimal replacement cycle is calculated to be 11 years and approximately 105,000 miles. At this point, the results of the LCCA can be used to update the replacement planning target values if desired. Before updating the values, be sure that the results are based on valid data. Updated planning values can be entered into the tool’s configuration file as appropriate. The LCCA computes the average LTD cost for all units by age. In the example in Figure 22, 45 units are 7 years old with an average LTD cost of $2.41 per mile. Step 6. Identify Units Flagged for Potential Replacement The optimization tool identified 104 tandem dump trucks as potential replacements because they were either past their replacement target of 120,000 miles set in the configuration file, or they had excessively high costs in comparison with the average cost for units of the same age in the class. The opti- mization tool displays the replacement candidates report, as shown in Figure 23. The replacement candidates are listed in descending order based on the unit’s LTD cost per mile com- pared with the class average. In this case example, Unit 51256 is 121% higher than the average and has been placed at the top. The report also shows the LTD miles for units that have exceeded the 120,000-mile utilization target. Column J, Con- dition Assessment Score, is blank because no condition assess- ment scores have been entered at this step in the process. The units listed in the replacement candidates report are only candidates for replacement at this point. Not all the units should be replaced solely because they have exceeded their replacement planning targets. Each unit should be evaluated individually to determine if it should be replaced. Step 7. Perform Condition Assessments The next step in the process is to conduct condition assess- ments. Condition assessments are very important as they pro- vide insight on individual equipment units, and the condition score is a key factor in determining replacement priority rank- ing. Condition assessments allow factoring in mission critical- ity into replacement decisions. #N/A designates no data available. Figure 22. Example of class-level LCCA, tandem dump trucks.

79 Figure 24 shows an example condition assessment for Unit 51131, which is listed third on the replacement candi- dates report because of its excessively high cost. The mission criticality for the unit is rated as “Very High” because of its assigned function. A tandem dump truck assigned to a high- priority snow route would be a good example of a unit that would be given a Very High mission criticality rating. In the example for Unit 51131 in Figure 24, the Body com- ponent has been rated Very Poor and will require major work within the next year. After rating all of the equipment compo- nents, the spreadsheet computed the overall condition score for this unit to be 36, which is low. All flagged equipment units should be assessed. If a large number of units will be assessed, the task can be delegated to the field shops. Some training would be required to ensure consis- tent results between shops. Performing condition assessments is a time-consuming task that could be performed as part of the annual inspection or service. In this way, condition scores will be readily available to input into the optimization tool. After the units have been assessed, enter the condition assessment scores in Column J of the replacement candidates report, as shown in Figure 25 (hypothetical condition scores are used in this example). Step 8. Determine Replacement Priorities After the condition scores are entered, the optimization tool determines a priority ranking based on a unit’s LTD cost and condition score. Only equipment units that have been assessed and whose condition scores have been entered into the tool are shown on the priority ranking list. In this case example, condition scores were entered for all 104 tandem replacement candidates. The optimization tool uses the weight factors from the con- figuration file to calculate priorities. In this example, weight values of 40% and 60% have been assigned to cost and condi- tion, respectively, as shown in Figure 26. During tool setup, input the weight factors that fit the agency’s needs, as long as they add up to 100%. The optimization tool displays the priority ranking, as shown in Figure 27. The priority ranking shows that Unit 51131 is now the highest priority unit for replacement, primarily because of its low condition score, which includes mission criticality. Step 9. Perform Unit-Level LCCA A unit-level analysis of individual equipment units can help make replacement decisions. To perform this analysis, enter the annual cost and utilization data as shown previously in Figure 17. For this example, choose a 15-year-old unit, Unit 51111. The unit was not in the priority ranking list but was selected to see how its life cycle cost was trending. The agency had annual dump truck data for only the first 9 years. To demonstrate the unit-level functionality, hypothetical data were entered for the remaining 6 years. Figure 28 presents the analysis results and shows that this unit may have passed its economic life. Step 10. Determine Replacement Program and Budget In this case example, the optimization tool identified 104 tandem dump trucks as possible replacement candidates and ranked them in priority replacement order. At this point, the replacement process could be considered complete if suf- ficient funds are available to replace all the candidate units. At a replacement cost of $117,000 each, $12.2 million would Figure 23. Replacement candidates report.

80 Equipment Number Description: Tandem Dump Truck Date: By: Joe Mechanic Equipment Criticality Weight 15 Good No rust, no body damage Fair Very little rust, minor body damage Poor Visible rust, some minor body repairs needed Very Poor Major rust or body damage. Requires major work within one year SCORE: 0.8 Weight 20 Good Good mechanical condition Fair Some minor services needed Poor Major repairs and more frequent maintenance needed Very Poor Major repairs needed within one year SCORE: 13.0 Weight 20 Good Good mechanical condition Fair Some minor services needed Poor Major repairs and more frequent maintenance needed Very Poor Major repairs needed within one year SCORE: 4.0 Weight 20 Good Good mechanical condition Fair Some minor services needed Poor Major repairs and more frequent maintenance needed Very Poor Major repairs needed within one year SCORE: 13.0 Weight 10 Good Good mechanical condition Fair Some minor services needed Poor Major repairs and more frequent maintenance needed Very Poor Major repairs needed within one year SCORE: 2.0 Weight 15 Good No rust or frame damage Fair Some minor rust and/or frame damage Poor Moderate rust and/or frame damage but safe to operate Very Poor Major rust and/or frame damage; safety concerns SCORE: 3.0 Overal Condition Score: 36 Notes: Lots of body work needed. Transmission is in poor shape, may need major work soon. Steering/Suspension Electrical Frame Vehicle Condition Assessment 51131 9/15/17 Transmission Engine Very High Body Figure 24. Example of vehicle condition assessment.

81 be needed to replace all units. However, this case scenario assumes only $8 million are available, which is enough to replace 68 units. The next step is to decide which specific units to replace. There is no defined process for making the final decision. The tool provides information to identify needs and analyze costs but it does not make the final replacement decisions. These decisions must also consider factors such as seasonal timing, bulk discounts, and other practical considerations that might not be easily quantified. The following general guidelines can be used in the decision-making process: • Use the priority ranking displayed in Figure 27 as the initial starting point. • Using the condition assessments, identify units that are in the best condition and that are not likely to incur high maintenance and repair costs in the next year. • Using the unit-level LCCA, identify the cost trends of individual units. • Consider cost, condition, and other objective factors to select the 68 units that will provide the optimal replace- ment program for tandem dump trucks. Step 11. Develop a 5-Year Plan This step is not needed to prepare the annual replacement program but it provides the fleet manager with information to quantify future funding needs and develop a long-range plan for replacement needs. The 5-Year Plan is a planning tool that is used to communicate future budget needs to upper management and budget decision makers. The optimization tool generated the 5-Year Plan, as shown in Figure 29, for this case scenario. The projected replacement needs for each year are deter- mined by comparing each unit’s current age with the target replacement age in the tool’s configuration file. The 5-Year Plan shows the projected year for replacement and the total budget needs for the year. Future costs are inflated based on the annual inflation rate from the configuration file. In this case scenario, the 5-Year Plan shows a $4.3 million backlog of replacement needs, and in 2020, for example, $19.2 million will be needed for replacement. To put the backlog and future annual funding needs in per- spective, consider that the case scenario has 720 tandem dump trucks in the fleet. At a replacement cost of $117,000 each, the replacement value for the tandem fleet is approximately $87.8 million dollars. If the target replacement for tandem dump trucks is 12 years, then the average annual replacement needs over the long term is $7.3 million. Figure 25. Condition assessment scores. Figure 26. Priority weight factors.

82 Figure 27. Priority ranking list. Figure 28. Example of unit-level LCCA for Tandem 51111.

83 This case scenario uses only the class of tandem dump trucks. If all equipment classes are included with data uploaded to the optimization tool, the 5-Year Plan will show total replacement needs for the entire fleet. The 5-Year Plan provides fleet managers with valuable information on future funding needs. Step 12. Analyze Cost Consequences An optional step in the annual fleet replacement process is to analyze the cost consequences if equipment is not replaced at their optimal life cycles. This step is not needed in the replacement decision-making process but it provides infor- mation that fleet managers can use to support the business case for funding levels. The optimization tool analyzes the annual cost of various replacement cycle scenarios. Figure 30 shows the analysis for the class of tandem dump truck case scenario. The optimiza- tion tool determined the optimal life cycle for tandem dump trucks to be 11 years. If the tandems are replaced on an aver- age of every 17 years, for example, the analysis shows that the cost would be about $608,000 more per year to own and operate the dump truck fleet. - in 2019 column designates years past due. Figure 29. Example of 5-year replacement needs. Figure 30. Cost consequences.

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TRB's National Cooperative Highway Research Program (NCHRP) Research Report 879: Optimal Replacement Cycles of Highway Operations Equipment acts as a handbook on equipment replacement concepts and an instruction manual for making cost-effective replacement decisions. The research report presents a process for determining replacement needs for highway operations equipment, identifying candidate equipment units for replacement, and preparing an annual equipment replacement program. The products include a guidance document and an Excel-based replacement optimization tool to support the equipment replacement process and facilitate its implementation.

Disclaimer - This software is offered as is, without warranty or promise of support of any kind either expressed or implied. Under no circumstance will the National Academy of Sciences, Engineering, and Medicine or the Transportation Research Board (collectively "TRB") be liable for any loss or damage caused by the installation or operation of this product. TRB makes no representation or warranty of any kind, expressed or implied, in fact or in law, including without limitation, the warranty of merchantability or the warranty of fitness for a particular purpose, and shall not in any case be liable for any consequential or special damages.

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